After almost two weeks of jawboning about Tuesday's rate decision helped send the Dow Jones Industrials up by 6.9%, or close to 900 points, in just nine sessions, the Federal Reserve's FOMC faces high expectations. The only problem is that the world's most powerful central bank might be something of a paper tiger in a short-term crisis.

Make no mistake -- a wink and a nod from a Fed official in an oversold market can pack more punch than Abby Joseph Cohen or Henry Kaufman in their prime, but the Fed's immediate options are limited, short of more unorthodox measures to inject "liquidity" into the system that might backfire by spooking the currency market.

No need to for now. In the past three months alone, there have been 10,035 print-media mentions of both the words "Fed" and "liquidity," according to Factiva. Many cite moves by the Fed to "inject" funds that were normal, temporary repo operations -- though fund manager and former finance professor John Hussman points out that only $16 billion of actual liquidity has been created since March, all of which has since been withdrawn.

"I strongly doubt that the Fed's actions are stimulative at all," Hussman said. "The Fed is like Oz -- it's important only because we believe that somebody must be at the controls."

Thimbles Of Water In A Forest Fire

For all the short-term fireworks the Fed manages to create in the stock market, it can fizzle awfully fast. Twice in the past four months there have been major recovery rallies of just over 11% in the Standard & Poor's 500 index in the wake of Fed action, and twice the gains have virtually melted away with the gloom about the housing and financial sector mess spooking investors anew. If there are no concrete signs of a recession, the third time could well be the charm -- but don't bet the house on it.

The last Fed easing cycle, which saw a whopping 30 rate cuts from 6% to an all-time low of 1% in the Federal funds rate, took a while to stick. Stocks rallied sharply around the time of some of the Fed's moves, such as its initial surprise cut in January 2001, but the S&P 500 dropped by 27.6% from the beginning to the end of the cycle in June 2003 as the economy entered and then exited a mild recession and then faced the 9/11 attacks. Other previous rate-cutting cycles have been great for stocks, most recently in 1998. Of course there was no recession then.

Hussman compares the Fed's efforts to revive the sputtering economy so far to "thimbles of water in a forest fire," and he cites lack of academic evidence that Fed actions affect market interest rates or lending activity.

"Economies recover with a long and variable lag all by themselves because of gradual adjustments and market forces," he said.

Other observers have a bit more faith in the Fed's ability to kick-start borrowing activity in the long run, but they say that parts of the financial markets are underestimating the severity of the problem. Bill Gross, Pimco's star bond fund manager, compared the loss of faith in some of the theoretically safest assets to a modern-day bank run.

"What we are witnessing is essentially the breakdown of our modern day banking system," he wrote. He calls this "a shadow system based on fragile foundations" that assumed, among other things, that asset-backed commercial paper carrying an AAA rating couldn't fail en masse. Now "it is a stretch of the imagination to suggest that 75 basis points of interest rate cuts by the Fed will bring back the love."

Gross notes that "neutral" Fed rates may be lower than what markets are pricing in as the ultimate overnight rate at the end of the current easing cycle. At the end of last week, Fed funds futures showed that odds of a 50-basis point cut to 4.25% on Tuesday fell to under 40% from over 70% early in the week. A rate of 3.5% is expected by this time next year. Even so, private sector borrowing rates such as LIBOR have resisted downward pressure even in the face of Fed actions, since banks are being stingier with their cash.

"Fed ease has lowered Treasury yields, but for the rest of the market -- the segment that influences the bottom line of U.S. corporations, homeowners, and consumers -- not much has changed," wrote Gross. "Those that claim that the current cycle of Fed ease will inevitably -- and shortly -- lead to vigorous economic growth do not really have their ears to the ground or their eyes on their Bloomberg screens."

Bernanke Put

It is at times like these that the stock market's reaction to economic news is most skewed. Following hints by Fed Vice Chairman Donald Kohn two weeks ago that the Fed saw the financial situation as more precarious than before, mildly negative reports were welcome.

"The behavior of the stock market since last August can be best interpreted in terms of a Bernanke Put, i.e. the stock markets' hope that a Fed easing will prevent a hard landing of the economy," wrote Nouriel Roubini, an economics professor at New York University.

Another factor is perceived cheapness even amid scary headlines. For example, dilutive private-sector bailouts of Citigroup Inc. (C) and UBS AG (UBS), two of the world's biggest banks, were cheered by investors. But Roubini argues that investors are underestimating the effect of a recession and are too bullish about the short-term benefit of rate cuts. He said this is why investors often get trapped in "sucker's rallies" at the beginning of Fed easing cycles. Hussman argues that S&P 500 profits could collapse by up to 40%.

Both Hussman and Roubini strongly discourage speculating on more gains now while Gross strikes a cautious tone in general. All three observers seem to think that the men behind the curtain at the Fed will have to keep pulling levers for a while before things turn around decisively.

(Spencer Jakab previously wrote the STREET SAVVY column, which has been rebranded as TAKING STOCK, a new global column which gives insightful analysis about equity-related topics around the world.)

"2008 will be the mirror image of 2007," Cohen said: Just as this year began with strong indicators and low volatility fading into a weakening market beset by high volatility, so next year will begin with "concerns over economic growth."

Growth will decelerate but "some staple-oriented names will do well," Cohen said.

However, by mid-year 2008, the U.S. economy will look accelerated again, the strategist predicts. "At that point, recessionary fears will fade away and the market can do much better."

"MARKET CAN DO MUCH BETTER"

Im sure she knows the markets are up over 100% in the last 5 years, how better does she want it, 25%-50% returns in a given year.